Edward Thurlow, Lord Chancellor of Great Britain in the late 1770s, is famously quoted as saying, “Corporations have neither bodies to be punished, nor souls to be condemned; they therefore do as they like.” In some way, he was quite right. Being a purely legal creation, the corporation is an intangible social institution that has no mind of its own. Even though it can legally “do” many things that persons can do, such as enter into contracts, own property, and even hire people, it has no body which can be put in prison if its “acts” are shown to be criminal. And it has no conscience to question its actions or to feel any guilt at all.
Why do governments allow, in fact encourage, the existence of an entity that has human powers but that cannot face human accountabilities or consequences for bad actions? In the first place, it is not the corporation itself that carries out actions. The actions are done in its name by managers and are approved by the board. Given this setup, governments rely on corporation law and related regulations to discourage and control corporate misbehavior. Government officials believe in the theory of corporate governance that the judgment of the corporation is exercised by its board of directors. The buck, as it were, stops at the board.
On January 1, the new Code of Corporate Governance for publicly listed corporations (PLCs) issued by the Securities and Exchange Commission (SEC) took effect. The third version of the Code since 2002, it has the strongest language on the moral role of the board in corporate affairs. It includes in its definition of corporate governance “a system of direction, feedback and control using regulations, performance standards and ethical guidelines to hold the Board and senior management accountable for ensuring ethical behavior — reconciling long-term customer satisfaction with shareholder value — to the benefit of all stakeholders and society.”
The new Code emphasizes the board’s duty not merely to comply with the law but also to observe ethical principles. It also reminds boards to carry out corporate activities to benefit not only stockholders but also other stakeholders and even society as a whole.
I wonder how PLC boards will respond to this new definition of their roles. I have high hopes that they will take their broader ethical roles to heart and not merely depend on the guidance of corporate lawyers. I have nothing against corporate lawyers per se because they provide important services as legal professionals. However, I worry when board directors and senior managers justify questionable acts by quoting their lawyers’ advice that such acts are legal. Corporate leaders should never outsource their consciences to lawyers. Legal decisions are not necessarily ethical.
I’m eager to know how the PLC boards will rise to the challenge of the corporate social responsibility principle in the new Code. Principle 16 states: “The company should be socially responsible in all its dealings with the communities where it operates. It should ensure that its interactions serve its environment and stakeholders in a positive and progressive manner that is fully supportive of its comprehensive and balanced development.” While many senior managers still equate corporate social responsibility with their philanthropic activities, the Code calls on PLCs to be socially responsible in all of their dealings with the public! Boards will need to make sure that all corporate systems, policies, and managerial behaviors are aligned to be sensitive to the legitimate needs of all corporate stakeholders.
To achieve this alignment, corporate culture is critically important. Alasdair MacIntyre, ethics professor of the University of Notre Dame, explains that no code of ethics can work without a culture of ethics. And a culture of ethics is what a corporate board needs to establish within the company. Only when such a culture exists can all managers and employees of the company learn to consistently behave in the best long-term interest of the company and its stakeholders.
Behavioral scientists say that the messaging tone, role modeling, and follow-through of the board and top management are the most important factors in shaping corporate culture. Corporate culture progress reports will have to be included in the agenda of board meetings. Directors will need to be as adept in discussing values and behaviors as they are in talking about financial results and market share. Recent reports on the Wells Fargo fake bank account scandal reveal high-pressure sales targets imposed from the top with matching incentives. I am not surprised by the resulting culture.
Can a corporation be an ethical being? Yes it can, but only if its board and management exercise ethical — not merely legalistic — judgment always.
Dr. Benito L. Teehankee is Full Professor of Management and Organization at De La Salle University.